Word On The Street

Welcoming Institutions

Is Bitcoin becoming the saviour speculative hedge for institutions, in a market torn apart by widespread uncertainty? If so, what does this mean for Bitcoin's ever diminishing supply?
Please remember that past performance may not be indicative of future results.
Is Bitcoin becoming the saviour speculative hedge for institutions, in a market torn apart by widespread uncertainty? If so, what does this mean for Bitcoin's ever diminishing supply?

Bitcoin has been bouncing around the $9,500 marker for around two months now, as it struggles to break through the key psychological resistance located at $10,000. Even considering the current climate, Bitcoin still stands at a not so modest 30% gain since the beginning of January. However, this is not to say there hasn’t been volatility. In that time, Bitcoin has bounced back fiercely, from a low of approximately $3,500, after we witnessed its major tipping point as COVID-19 fears drove large-scale liquidations on March 12th.

Looking back to three months prior and pre-COVID-19, the world looked like a very different place. One of the only similarities you could draw on is that global equities still seem to be on a bullish trajectory, with no end in sight. Apart from usually, there is an end, and investors are avidly looking to plan their escape if one does eventually reveal itself.

J.P. Morgan changes tune

J.P. Morgan, a known critic of Bitcoin, recently came forward with a rather estranged compliment, which stemmed from a report led by head of their US interest rate derivatives strategy Joshua Younger and cross asset research analyst Nikolaos Panigirtzoglou, stating that Bitcoin is beginning to show “longevity as an asset class”.

J.P. Morgan strategists cite, in an article published by Bloomberg on Friday, that although from a price perspective, Bitcoin was tackled by the largest spout of volatility of all asset classes, due to the fact that its market price only dipped below ‘the cost to mine’ very briefly, before rebounding fiercely, gives promise to Bitcoin’s maturity and resilient market structure.

This point-of-view can only be reinforced by Bitcoin’s incomparable performance against currencies, equities, Treasuries and gold in the midst of the crisis. It’s also worth mentioning that although Bitcoin saw among the most severe drops in liquidity around the peak of the crisis, the disruption unwound itself much faster than other asset classes.

Investors seek out alternatives

Developments from our side of the field come from Grayscale Investments, specifically their Bitcoin Trust. The long-standing investment trust enables accredited investors to gain access and exposure to the price movement of Bitcoin in the form of a traditional security without buying, storing and safekeeping Bitcoin directly. Neat hey?

Recently, Grayscale have seen a gigantic influx in institutional interest for their Trust, resulting in them being able to on-board $400 million worth of investment so far in Q2 (as of May 28th). It is also worth noting that a massive 88% of this investment came from institutions, the majority being hedge-funds. This consequently translates to Grayscale Investments purchasing approximately 18,910 Bitcoin since the halving on May 11th. However, due to the 50% reduction in Bitcoin mining rewards, which is the potential flow of new Bitcoin coming onto the market, miners have only been able to generate 12,337 Bitcoin since the halving.

Theoretically, this means that Grayscale Investments have single-handedly bought all newly generated Bitcoin that have come onto the market since the halving… and then some. This level of buying power coming from one single entity begs the immediate question: what happens to Bitcoin’s market price once more institutions begin to dabble in the digital dimension?

According to a recent report published by KKR, a globally renown asset manager, based out in the U.S. Currently, ultra-high net worth individuals have adopted an average portfolio allocation of 46% to alternative assets. This fact aligns quite nicely with Glassnode’s The Week On-Chain report, which states that the population of Bitcoin ‘whales’ (investors with holdings equating to 1000BTC or more) is on the rise, and fast approaching levels not seen since September 2017. When Bitcoin was on a yearlong steady increase, and sitting just above $5,000, before reaching its all-time high of $20,000 as fast as December.

The evidence shows that it’s clear there is a growing demand for investment vehicles that can elicit institutions and investors of a higher net worth access to Bitcoin and other cryptocurrencies. But, the news isn’t all optimistic, as we discovered two weeks ago, when word rapidly spread that the wealth management division at Goldman Sachs recently held a presentation in which they described Bitcoin and cryptocurrencies as “not a viable asset class”. But, of course, as we all know by now, it’s important to take into consideration that these organisations encompass multiple departments and sectors which span across the globe. All of whom are likely to have a slightly different perspective on the same matter.

It is also worth noting that in September 2018, Goldman Sachs Chief Financial Officer Martin Chavez said the bank was working on a Bitcoin derivative to meet the demand from clients.

We can safely say that, although Goldman Sachs remain undecided about Bitcoin and its future. There is no doubt that institutional adoption is rapidly growing and with J.P. Morgan reportedly opening accounts for crypto exchanges (namely Coinbase and Gemini), the perception of major financial conglomerates may change sooner than we anticipate.

Whatever your individual or organisational stance on Bitcoin is currently, it is important to commit to doing your own research, and form your own opinion. It might also be particularly helpful to remember these wise words:

“Forget what they say, remember what they do.” – Unknown
Best wishes,
Blake & Connor

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Please note, nothing in this letter is intended to serve as financial advice. Always conduct your own research. Thank you.
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